Middle class hypocrisy extends to investments

The wage inflation facing the Indian middle class brings out what Swaminathan Aiyar terms as "Middle class hypocrisy" in his column in The Sunday Times on 2 October. The topic of conversation in every household nowadays is rising inflation, which is impacting household budgets.

Inflation as measured by the wholesale price index (WPI) averaged 9.6 percent in fiscal 2010-11, the highest in over a decade. Inflation is running at 9.78 percent levels at present and is only expected to come off in the first quarter of 2012.

However, the common complaint among households is the higher wages demanded by hired help. The Indian middle class, hit by inflation, does not want to pay higher wages for household help, despite knowing fully well that inflation is affecting the poorer class the most.

Indian investors, too, can be placed in the category of "middle class hypocrisy". Investors want to make money in financial markets, lament when they lose money by taking wrong advice and yet refuse to acknowledge that good, unbiased advice will not come for free.

Indian households are used to subsidies and poor service because of the subsidies.Reuters.

The common topic among investors is the wrong investments made at the wrong time, which is causing a deep hole in their savings. Investors complain about how they were pushed into buying expensive insurance policies, expensive stocks and expensive new mutual fund offers by slick targeted selling and marketing by financial service product manufacturers and distributors.

Investors acknowledge that they would have saved a lot of money and heartburn by listening to good advice. However, investors still baulk at paying for good advice, similar to that of the middle class baulking at paying household help. The fact that paying will get them better advice or service is still not ingrained into the minds of the Indian investor.

Indian households are used to subsidies and poor service because of the subsidies. A cooking gas cylinder that is subsidised in no longer easy to get as oil companies are bleeding due to non-payment of dues from the government. Railway ticket prices do not go up but service quality is deteriorating day by day. Taxes do not go up but interest rates go up due to weak government finances. The list is endless. Indian the middle class truly believes that services will never improve even if they pay more.

The belief that services never improve is ingrained in the mind of the Indian investor. The investor believes that whatever the advice, paid or free, he or she will never make money. Making money in the markets is a losing game. However, one can be certain that the investor will again get caught in the next bull run, investing in wrong products at the wrong time. After all, if one has not lost money, one does not have the right to complain!

SEBI is pushing reforms in selling financial services and products. One of the key reforms is separating advice from commission on sales. The regulator believes that if the investor pays for unbiased advice, she will not be pushed by unscrupulous distributors of financial products into buying wrong products or services. In theory the approach by SEBI is right, but with the "middle class hypocrisy" will it ever work?